The modern-day parable of the run on Northern Rock
Thursday, 27 September 2007
Philip Stephens
THE banks, we used to think, are as safe as houses. The trials of Northern Rock have left neither looking especially secure. After years in the stratosphere, house prices now look set to succumb to the force of gravity. And the choice between the bank vault and the mattress no longer looks quite so one-sided.
You could say that the fall of Britain's fifth largest mortgage lender is a familiar enough tale. Start with a liberal dose of credulity and greed, stir in complacency and the calculated complexity of today's capital markets and you have the classic ingredients for a financial failure.
A visitor from elsewhere might wonder, of course, what all the fuss is about. We are not talking, after all, about the collapse of Citibank or even, dare one say it, Barclays or Lloyds TSB. By global standards, Northern Rock is a pretty modest institution. Few believe the name can survive the past few days. But then few beyond its base in the north-east of England, probably, will miss it.
For all that, Northern Rock's fall has become something of a parable for the times: a story of the insecurity, mistrust and powerlessness that often seem to best describe our world. It speaks to the fragility of the international system we call globalisation; of the capacity of fear to shape events; and of governments powerless to halt an erosion of confidence in once solid institutions.
Bank failures have been with us for as long as we have had banks. The history books are littered with accounts of depositors falling prey to financial chicanery and credit bubbles. And you can still find people in the City of London with personal recall of past collapses: the secondary banking crisis of the early 1970s; the closure of the London-based Bank of Credit and Commerce International after it turned out to be a front for all sorts of nefarious activities; and the demise of Barings, one of Britain's most revered financial institutions, at the hands of a single rogue trader.
Yet, the manner and circumstance of Northern Rock's troubles were different. The casualties of this latest affair are still being counted. One looks likely to be Britain's system of banking regulation and deposit insurance; a second (unfairly) may be the reputation of Mervyn King, the governor of the Bank of England. Gordon Brown, the prime minister, has his fingers crossed that his re-election prospects will not be the third. The fourth, though, may turn out to be the most enduring: the further destruction of trust.
What made this crisis special was television: the hour-by-hour images of anxious and angry depositors crowding the branches of Northern Rock the length and breadth of the land. When Britain last witnessed a run on a bank, the menfolk still dressed in top hats and tails. In those days, there were no television cameras to record the havoc.
This time, as depositors at Northern Rock ignored the fumbling assurances of ministers and financial authorities alike, there was a temptation to put it all down to an outbreak of mass hysteria. In reality, the people queueing to empty their accounts were behaving entirely rationally.
Most obviously, those with sizeable savings were not fully insured. Yet there was more to the rush than that. Everyone knew that the other banks were refusing to lend to N
THE banks, we used to think, are as safe as houses. The trials of Northern Rock have left neither looking especially secure. After years in the stratosphere, house prices now look set to succumb to the force of gravity. And the choice between the bank vault and the mattress no longer looks quite so one-sided.
You could say that the fall of Britain's fifth largest mortgage lender is a familiar enough tale. Start with a liberal dose of credulity and greed, stir in complacency and the calculated complexity of today's capital markets and you have the classic ingredients for a financial failure.
A visitor from elsewhere might wonder, of course, what all the fuss is about. We are not talking, after all, about the collapse of Citibank or even, dare one say it, Barclays or Lloyds TSB. By global standards, Northern Rock is a pretty modest institution. Few believe the name can survive the past few days. But then few beyond its base in the north-east of England, probably, will miss it.
For all that, Northern Rock's fall has become something of a parable for the times: a story of the insecurity, mistrust and powerlessness that often seem to best describe our world. It speaks to the fragility of the international system we call globalisation; of the capacity of fear to shape events; and of governments powerless to halt an erosion of confidence in once solid institutions.
Bank failures have been with us for as long as we have had banks. The history books are littered with accounts of depositors falling prey to financial chicanery and credit bubbles. And you can still find people in the City of London with personal recall of past collapses: the secondary banking crisis of the early 1970s; the closure of the London-based Bank of Credit and Commerce International after it turned out to be a front for all sorts of nefarious activities; and the demise of Barings, one of Britain's most revered financial institutions, at the hands of a single rogue trader.
Yet, the manner and circumstance of Northern Rock's troubles were different. The casualties of this latest affair are still being counted. One looks likely to be Britain's system of banking regulation and deposit insurance; a second (unfairly) may be the reputation of Mervyn King, the governor of the Bank of England. Gordon Brown, the prime minister, has his fingers crossed that his re-election prospects will not be the third. The fourth, though, may turn out to be the most enduring: the further destruction of trust.
What made this crisis special was television: the hour-by-hour images of anxious and angry depositors crowding the branches of Northern Rock the length and breadth of the land. When Britain last witnessed a run on a bank, the menfolk still dressed in top hats and tails. In those days, there were no television cameras to record the havoc.
This time, as depositors at Northern Rock ignored the fumbling assurances of ministers and financial authorities alike, there was a temptation to put it all down to an outbreak of mass hysteria. In reality, the people queueing to empty their accounts were behaving entirely rationally.
Most obviously, those with sizeable savings were not fully insured. Yet there was more to the rush than that. Everyone knew that the other banks were refusing to lend to N